Canada: CRTC Approves Sale Of BCE

The Canadian Radio-television and Telecommunications
Commission (CRTC) has granted conditional approval of the deal
to privatize Bell Canada Enterprises (BCE), Canada's
largest telecommunications company.

Under the transaction, BCE, which is also Canada's most
widely held publicly traded company, would become owned by a
small group of investors that includes the Ontario
Teachers' Pension Plan (Teachers') and three
American private-equity firms, Providence Equity Partners
International VI L.P. and its affiliated investment funds
(Providence), Madison Dearborn Capital Partners V L.P. and its
affiliated investment funds (Madison) and Merrill Lynch Global
Partners, Inc. (Merrill Lynch). The transaction, valued at
$51.7 billion, is the largest corporate acquisition in Canadian
history and reputedly the largest private equity transaction in
the world to date.

The transaction was subject to approval by several Canadian
regulators, including CRTC approval under the Broadcasting
Act. Although BCE's main business unit, Bell Canada,
is a telecommunications carrier, it has interests in several
broadcasting licensees, leading to the requirement for
Broadcasting Act approval. The CRTC review was
primarily aimed at ensuring that BCE will remain "Canadian
owned and controlled" within the meaning of Canadian
communications laws1. These laws restrict the number
of voting shares that can be held by non-Canadians in regulated
Canadian communications businesses2 and the number
of board members that can be non-Canadian3. More
significantly, they require the regulators to ensure that
non-Canadians cannot exercise "control in fact" over
the business, through any shareholder agreements or other
arrangements.

The CRTC's approval and the conditions it imposed on BCE
are generally consistent with recent regulatory precedents,
applied to the specific circumstances of the BCE
transaction.

The Commission reiterated the legal test for control that it
approved when it reviewed the sale of Alliance Atlantis
Broadcasting Inc.'s broadcasting companies4.
According to that test, "control in fact generally can be
viewed as the ongoing power or ability, whether exercised or
not, to determine the strategic decision-making activities of
an enterprise. It can also be viewed as the ability to manage
and run the day-to-day operations of an enterprise."

Applying this test to the facts of the BCE transaction, the
Commission required:

changes to ensure that the majority of BCE's Board of
Directors would always comprise directors who are both (1)
Canadian by citizenship or residency and (2) whose
appointments are not directly or indirectly controlled by
non-Canadians

increases in the thresholds for future BCE transactions
that non-Canadian shareholders could veto (e.g. incurring
debt, selling assets and making investments) to at least 5%
of the value of the broadcasting undertakings

changes to the proposed Independent Programming Committee
to ensure broadcast programming decisions were made by
Canadians; and

other changes to the corporate governance structure,
including the makeup of the executive committee and the
quorums for board meetings, to satisfy itself that BCE would
not be effectively controlled by non-Canadians.

The CRTC also expressed concerns about whether the structure
of the transaction complied with Ontario pension legislation,
but, as discussed below, deferred to an opinion from the
Ontario pension regulator that the deal was compliant.

The BCE transaction remains subject to regulatory approval
by Industry Canada under the Radiocommunication Act.
In addition, the transaction has been the subject of litigation
by certain Bell Canada bondholders. On March 7, 2008, the
Québec Superior Court approved BCE's plan of
arrangement for the transaction and dismissed all claims of the
bondholders. The decisions dismissing these claims are
currently under appeal. The transaction is also subject to the
successful completion of financing arrangements made by
Teachers' and its private equity co-investors.

Background of the Proposed Transaction

BCE Inc. is the incumbent telecom service provider in most
of Ontario and much of Québec and the Maritimes. Its
subsidiaries include Bell Canada, Bell Mobility Inc., Bell
Aliant Regional Communications Income Fund and Bell ExpressVu
Inc. The companies provide telecom services including local and
long distance phone service, wireless voice and data, and
wireline Internet access. They are also involved in the
distribution of broadcast services by satellite and terrestrial
networks, as well as pay-per-view and video-on-demand
services.

The CRTC received an application by BCE and some of its
affiliates (the applicant) for authority to transfer effective
control of the applicant to a corporation to be incorporated
(BCE Holdco). BCE Holdco would hold the shares of BCE through
its subsidiary 6796508 Canada Inc. (Bidco).

BCE and Bidco entered into a definitive agreement, effective
29 June 2007, pursuant to which Bidco agreed to purchase all of
BCE's issued and outstanding common and preferred shares
(BCE proposal). The BCE proposal was approved by a majority of
BCE shareholders at a special shareholder meeting that took
place on 21 September 2007 in Montréal.

The proposed transaction is to be effected by way of a Plan
of Arrangement under section 192 of the Canada Business
Corporations Act. The estimated value of the transaction
is $51.7 billion.

Following the completion of the transaction, BCE Holdco
would be privately owned, with share capital consisting of
Class A voting, non-participating shares (Class A shares),
Class B non-voting, participating shares (Class B shares) and
Class C non-voting, participating shares (Class C shares). The
Class B and Class C shares would be economically equivalent and
would together represent the total equity value of BCE
Holdco.

Morcague Holdings Corp. (Morcague) would hold 66.7% of the
Class A shares of BCE Holdco, with the balance of 33.3% held by
non-Canadians, namely Providence, Madison and Merrill Lynch.
The Class A shares would be subject to a voting agreement
between Morcague and Teachers' Private Capital, a division
of Teachers'.

The majority of the Class B shares and all of the Class C
shares of BCE Holdco would be held by Canadians, with
Teachers' holding the largest equity stake in the company
at 51.6%. Non-Canadians would hold approximately 42% of the
equity of BCE Holdco, with Providence (17.3%), Madison (9.0%)
and Merrill Lynch (6.1%) being the largest non-Canadian
shareholders.

Bidco and BCE would have Class A and Class B shares issued
and outstanding. BCE Holdco would own 100% of the Class B
shares and 58.1% of the Class A shares of Bidco, with the
balance of 41.9% of the Class A shares held by Morcague.
Similarly, Bidco would own 100% of the Class B shares and 58.1%
of the Class A shares of BCE, with the balance of 41.9% of the
Class A shares held by Morcague. A summary of the proposed
equity structure can be found on the Commission's website
at http://www.crtc.gc.ca/Broadcast/eng/HEARINGS/2007/ex2007-19.htm.

Regulatory Approvals

The transaction required approvals from a number of
regulatory agencies, including the CRTC, Industry Canada,
Investment Canada and the Competition Bureau.

The CRTC must approve the proposed transaction under the
Broadcasting Act, as a result of the proposed
transfer of BCE's broadcasting assets (the subject of
today's decision). The CRTC also reviews ownership of
telecommunications carriers under the Telecommunications
Act on a periodic basis. Industry Canada, which acts as
Canada's spectrum regulator, must also review the proposed
transaction under the Radiocommunication Act.

The tests for Canadian ownership and control are similar
under all three Acts, and stricter than those under the
Investment Canada Act, which is therefore unlikely to
pose a significant hurdle for the transaction. The fact that
the investors acquiring BCE do not directly compete with it
simplifies the Competition Act review.

Ownership and Control Review under the Broadcasting
Act

The CRTC has authority under the Broadcasting Act
to regulate the broadcasting system in Canada to implement
identified policy objectives, including the requirement that
the Canadian broadcasting system be effectively owned and
controlled by Canadians5.

The Governor in Council6 has issued a direction
to the Commission, pursuant to subsection 26(1) of the Act,
respecting the classes of applicants to whom licences may not
be issued or to whom amendments or renewals thereof may not be
granted (the Direction)7. Pursuant to the Direction,
no broadcasting licence may be issued, and no amendment or
renewals thereof may be granted, to an applicant that is a
"non-Canadian." A "Canadian" is defined to
include a "qualified corporation."

The Direction defines a qualified corporation as a
corporation that is incorporated or continued under the laws of
Canada or a province, and that meets the following
conditions:

the CEO and 80% of the directors are Canadians; and

Canadians beneficially own and control, directly or
indirectly, in the aggregate and otherwise than by way of
security only, at least 80% of all votes and all voting
shares, both issued and outstanding.

In the case of a corporation that is a subsidiary
corporation,

the parent corporation must be incorporated or continued
under the laws of Canada or a province; and

Canadians must beneficially own and control, directly or
indirectly, in the aggregate and otherwise than by way of
security only, not less than 662/3% of all votes
and all voting shares, both issued and outstanding.

Further, if a corporation does not meet the criteria set out
above (i.e., the CEO or more than 20% of directors are not
Canadian, or Canadians do not own and control 80% of all votes
or of all issued or outstanding voting shares), then neither
that corporation nor its directors may exercise control or
influence over any programming decisions of a subsidiary that
is a broadcasting licensee. Instead, an "independent
programming committee" must be established, with
responsibility for the programming decisions of the subsidiary
corporation.

"Control" is an important aspect of the test.
Under the Direction, the Commission is to determine whether an
applicant is controlled by a non-Canadian, on the basis of
personal, financial, contractual or business relations, or any
other considerations relevant to determining control in
fact.

An important factor in determining whether non-Canadians
exercise effective control over a broadcasting licensee is the
degree of influence that non-Canadian investors can exercise
through the board of directors and its committees. In that
respect, the Commission examines such elements as the number of
board and committee members appointed by Canadian investors and
by non-Canadian investors, respectively, and whether directors
designated by Canadian investors are adequately represented at
all board and committee meetings.

Specific Rulings on Canadian Control

After considering the issues related to Canadian control,
the Commission made its approval of the transaction conditional
on specific amendments to the "Principal Investor
Agreement" between the investors. The Commission's
conditions were aimed at achieving the following
objectives:

to fix the membership of the Board of Directors at
thirteen including, within the total membership, six
designees of Teachers', one Independent Director and the
CEO, all of whom must be Canadians;

to provide that the Chair of the Board will have a
tie-breaking vote over the appointment and dismissal of the
CEO;

to provide that a Chair will be appointed to the Board at
all times, that the Chair will be a member of the Board but
will not be a designee of a non-Canadian shareholder, will be
a Canadian, and will not also serve as the CEO;

to include a requirement that any vacancy on the Board or
on a committee of the Board caused by Teachers' losing
the right to designate a member be filled by the designee of
the Canadian investor who acquires the largest number of
shares from Teachers', and that any such designee must be
a Canadian;

to require BCE Holdco to maintain the same quorum
requirements for the committees of the boards of Bidco and
BCE as apply to BCE Holdco;

to deem members of the Board designated by the
non-Canadian principal investors to be non-Canadian for
purposes of determining whether a quorum is present at any
meeting of the Board;

to add a second Teachers' designee to the Executive
Committee;

to increase the threshold for transactions requiring
investor approval to $110 million (so satisfying the 5% of
undertaking value adopted by the Commission in its
CanWest/Alliance Atlantis decision); and

to incorporate specific definitions of
"independent" (in the context of "independent
directors") and "ordinary course" (in the
context of shareholder approval of transactions not in the
ordinary course of business).

In addition to requiring BCE to file the amended Principal
Investor Agreement, the Commission directed it to file:

an executed amended By-law establishing the Independent
Programming Committee, and providing that no member of the
committee will be a director, officer or employee of any
non-Canadian shareholder; and

an executed amended Advisory Services Agreement,
including amendments providing that the services rendered
under that agreement by non-Canadian investors will not
relate to programming and that Teachers' will be entitled
to review and provide input with respect to the
services.

Subject to compliance with these conditions, and its
determinations regarding the tangible benefits package
(summarized below), the Commission approved the
application.

Compliance with Ontario Pension Legislation

The Commission also considered the issue of whether the
structure of the transaction complied with Ontario pension
legislation. The relevant law8 prevents a pension
plan from investing directly or indirectly in securities of a
corporation to which are attached more than 30 percent of the
votes that may be cast to elect the directors of the
corporation (director-voting shares).

Under the proposed transaction, Teachers' would not own
more than 30% of the director voting shares, indeed it would
own no voting shares at all. However, a company owned by a
former Teachers' executive, Morgan McCague, would own 66.7%
of the class A voting shares in BCE Holdco. An agreement
between Teachers', Mr. McCague, Mr. McCague's company
and related companies requires the shares to be voted in
accordance with Teachers' instructions and gives Teachers
the right to require Mr. McCague to transfer the shares.

The CRTC accepted this arrangement only after being provided
with a letter from the Financial Services Commission of Ontario
stating that the proposed structure complied with the 30%
restriction on Teachers' holding director-voting
shares.

Tangible Benefits

The broadcasting assets involved in this transaction include
Bell ExpressVu, cable assets in the province of Québec
and a minority stake in CTVglobemedia Inc. The Commission
generally expects applicants to commit to specific benefits to
the broadcasting system representing a financial contribution
of 10% of the value of the broadcasting assets transferred in a
transaction. However, no benefits are required for the transfer
of control of broadcasting distribution undertakings (such as
Bell ExpressVu or the Québec cable assets), but only
broadcast programming undertakings.

BCE allocated $109.6 million of the transaction value to the
applicable broadcasting assets for the purpose of calculating
the associated tangible benefits.

The Commission revised the value of BCE's applicable
broadcasting assets from $109.6 million to $219.1 million,
based largely on inclusion in the valuation of an identified
acquisition premium, the value of BCE's "IPTV"
service (Internet Protocol pay-per-view and video-on-demand)
and the value of operating lease commitments. This higher
valuation increased the tangible benefits package to $21.9
million. As part of this package, the Commission has directed
that $10.5 million be placed in a fund whose annual revenues
will support new media initiatives.

Conclusion

The CRTC's decision is generally consistent with recent
precedents involving other transactions reviewed by the CRTC
and Industry Canada. However, the decision provides useful
guidance on issues related to the specific circumstances of the
BCE transaction.

Footnotes

1 Principally the Broadcasting Act. However
the Telecommunications Act and the
Radiocommunication Act also regulate the ownership and
control of Canadian telecommunications and broadcasting
companies such as BCE.

2 It is often incorrectly reported in the media and
elsewhere that Canadian law limits non-Canadians to owning no
more than 46.7% of a telecommunications or broadcasting
company. In fact, the rules limit the holding of voting shares
by non-Canadians to 20% at the operating company (or broadcast
licensee) level and 33.3% at the holding company level. Voting
rights cannot be cumulated between two companies to total
46.7%. There is no specific limit on the percentage of
non-voting shares that can be held by non-Canadians.

3 20% at the level of a telecommunications carrier or
broadcasting licensee.

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